A Consumer's Tool Kit: From 'Whistleblowing' To Class Action

Class action lawsuits are surely an extreme manifestation of the failure of corporate governance in business. But they are a means of empowering - in hindsight - the individual consumer and providing a means of redress. Another way of doing that before the expensive damage is done, is by strengthening internal corporate structures to allow that same individual consumer- as worker- to play a bigger role at catching the governance as it slips but before it falls: by 'whistleblowing.'

The U.K. regulator, the Financial Conduct Authority (FCA) has, it seems, decided to do just that in a bid to help clean up the financial services industry, or as it more diplomatically puts it: "to build on and formalize the good practice already widespread in the financial services industry."

Last week it published new rules that "aim to encourage a culture in which individuals working in the industry feel comfortable raising concerns and challenge poor practice and behavior."

"Whistleblowers play an important role in exposing poor practice in firms and they have in the past few years contributed intelligence crucial to action taken against firms and individuals. It is in the interests of the industry and regulators alike that wrongdoing is identified and addressed promptly. For individuals to have the confidence to come forward, it is vital that firms have in place adequate policies on dealing with whistleblowers and that a senior manager takes responsibility for overseeing these policies" said Tracey McDermott, acting Chief Executive of the FCA.

These rules, which take full effect in September 2016, apply to deposit-takers - banks, building societies, credit unions - with over £250m ($383m) in assets, and to insurers subject to the EU Solvency II directive, and are "non-binding guidance" for all other firms it supervises. Firms will be required to appoint a Senior Manager (part of a new regime designed to ensure accountability at the most senior levels) to be a champion for whistleblowers, to put into place internal arrangements that are "able to handle all types of disclosure form all types of person" and to make it clear by means of text in 'settlement agreements' that workers have a legal right to blow the whistle.

Businesses covered will also have to present a report on whistleblowing to the board, at least annually.

The U.K. regulator has stopped short of the 'incentive' payments for whistleblowers that are common in the United States. There is a strong ethical argument that can be made for keeping money out of the equation for greater clarity of purpose.

The FCA has, in recent years, taken a number of steps to encourage whistleblowers to come forward to the organization, and there has seen a 28% increase in whistleblowing disclosures. In the financial year 2014/15 there were 1340 whistleblowing disclosures recorded against 1040 in 2013/14.

But in the financial year 2007/08 - the year of the financial crisis, the then Financial Services Authority received only 138 such disclosures. Has the person on the street - who also, perhaps, works for one of these organizations - become fed up to the point of wanting to be involved in improving matters?

Certainly human watchfulness within any organization -in any industry sector- is a powerful tool for change. Coverage by the Financial Times of the Volkswagen emissions scandal, based on interviews with the company's workers and ex-workers and executives alike suggests there were many clues via 'patterns of behavior' evident in management as it headed for corporate disaster.

Hindsight is of course, a wonderful thing, and has resulted in an enormous boom for litigation. Until now, the U.K. has not had class-action lawsuits in the U.S. tradition, where people can sue on behalf of a much larger group wanting redress.

When individual consumer power and regulation come together in a pincer movement, any business wishing to dismiss ways of improving its corporate governance could find itself in that uncomfortable position: between a rock and a hard place.